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February 29, 2008
Extension Update
Extension Update is a weekly summary of news from Extension, government, and other attributable sources, focused on marketing, farm management, and other issues that are of interest to Midwestern farm owners and operators.
USDA expects a 10% increase in soybean acreage for 2008, but IL Extension economist Darrel Good questions the need for so much, which he says a trendline yield would give a nearly 3 bil. bu. crop. He calculates current market prices to give a revenue advantage to corn in IL at least. He remembers the price relationship at this time in 2007 and says the market must avoid the mistake that tentatively caused too large a shift from corn to beans.
Darrel Good’s concern is that USDA acreage forecasts call for more crop acres than what is available. USDA’s corn, bean, and wheat acres total 225 mil., but Good says the US will be unable to produce that much, unless about 2 mil. acres of pasture becomes crops. Read more.
La Nina is getting stronger, but also is showing age, says Iowa St. meteorologist Elwynn Taylor, who maintains a 70%+ chance of the US corn yield averaging below 150.6 bu. Taylor says the March outlook is typical with a dry tendency in the High Plains, and from So. California to the Southeastern US. His July-August Midwest precipitation outlook is expected to be a typical warmer, drier La Nina pattern.
Two weeks and counting before the crop insurance deadline, and if the choice between CRC and RA is hard, IL Extension economist Gary Schnitkey says there is a 30% chance that CRC rules will restrict the size of the indemnity, should volatility impact fall harvest prices. Read more.
Crop Revenue Coverage has a $1.50 limit on the amount that corn prices can rise between the spring and fall prices, and $3.00 for beans. Revenue Assurance does not have those limits. If you need help Schnitkey has developed numerous decision aids for crop insurance.
As acreage increases for transgenic corn, Ohio St. crop specialist Peter Thomison grows more concerned about the potential for transgenic pollen contaminating a neighboring field that may not have a biotech corn hybrid planted. He says growers are going to have a difficult time ensuring that their non-transgenic corn remains that way.
How do you isolate non-transgenic corn? Thomison says talk to neighbor to find out what is planted where. Stagger planting dates and plant hybrids with various maturities. He says take steps now to make sure non-transgenic fields are isolated. He also said with the popularity of triple stack hybrids, the chance increases for erosion of the 20% acreage requirement for refuges. Thomison says refuges are all that will keep biotech working.
USDA’s cattle on feed report for Feb. indicates a 2% rise from Feb. of 2007, but down 1% from Jan. and down from 2006. There were 11.996 mil. head in feedlots, with 1.787 mil. head placed in lots and 1.858 mil. head marketed. Livestock economist Shane Ellis at Iowa St. says, “With the decline in beef cow numbers, feedlot placements and marketings in 2008 will be steady to slightly lower than those of last year.”
Even with high feed prices, Ellis says feedlots will still buy cattle. “However, the higher costs of feeding will continue to drive down the price that feedlots can pay for calves and yearlings. Feedlots will also become more specific about what price they”ll pay for each weight class of cattle as they try to work in profitability in the face of tight margins.” Read more.
Ten years out, what will the US livestock industry look like? Missouri livestock economist Glenn Grimes provides statistics from the USDA projection for 2017.
1) Pork consumption drops from 50.5 pounds in 2007 to 48.8 pounds in 2017 per capita.
2) Beef declines from 65 pounds in 2007 to 60.1 pounds in 2017 per capita.
3) Broilers increase from 85.4 pounds in 2007 to 88.1 in 2017.
4) The beef industry in U.S. would be about the same size in 2017 as 2007.
5) The pork industry would be 5% larger, but broilers would be 12% larger.
If you have wheat, Iowa St. agronomists suggest a broadcast of red clover over your wheat in late March or early April for frost seeding. It will provide nitrogen to the wheat, forage for livestock, and build soil quality. They say it has a fertilizer replacement value for corn of 80-120 lbs./A. Read More.
Weeds steal moisture, sunlight and nutrients from crops, but how about that nitrogen applied last fall? Bob Hartzler at Iowa St. says, “Corn yields were not reduced when weeds were controlled at the 4-inch stage, but delaying application until weeds were 12-inches resulted in a 9% yield loss averaged over the two years.” If the weeds reduce nitrogen availability for the corn, then higher rates are required for optimum yields.
Weeds develop herbicide resistance, bugs develop insecticide resistance, why not fungi? They do says IL Extension crops specialist Jim Morrison, who says rotate fungicides between groups next year to avoid development of fungicide resistance. Fungicide family charts are available.
It is a farm. It produces food. But it also has gross revenue of $10 per row foot, and Ohio St. Extension specialist Joe Kovach gets $90,000 per acre with his experimental pest management program. It features plots with a mix of such high-value crops as snap peas, green beans, blueberries, raspberries, strawberries, tomatoes and edamame. It is designed to prevent pests, but he’s not solved the problems with Japanese beetles & deer.
Posted by Stu Ellis at 12:11 AM | Comments (0) | Permalink
February 28, 2008
If The US Government Continues Ethanol Subsidies, Then The Corn Market Will Follow Crude Oil Prices.
Pictures of a Middle East oil sheik may foster dislike, anger, frustration, and other negative emotions because they have control over the price we pay for crude oil and eventually gasoline. But standing beside the sheik in his white gown and distinctive head gear may be a Midwestern farmer with his own distinctive head gear with a seed corn logo. As the bio-fuels era moves into a higher gear, it is ironic these boys on the opposite ends of the love-hate spectrum could be in cahoots.
Early in the gasohol era, ethanol promoters touted the slogan “There is an oil well in every cornfield.” So right they were, although it has taken nearly three decades for ethanol prices to become linked to the price of crude oil. They are in lock-step says Purdue economist Wally Tyner and colleague Farzad Taheripour, whose analysis of the integration of the energy and agricultural markets is focused on a new generation of Cornbelt ethanol sheiks. Their research shows there is a very low correlation between energy and agriculture, but when they correlate ethanol with either crude oil or gasoline, the correlation jumps to nearly 90%.
The linkage began growing stronger as ethanol refiners began to consume more than 10% of the corn crop, and with 30% of the crop headed into refinery this year the relationship strengthens further. They suggest it is “perhaps the most fundamentally important change to occur in agriculture in decades.” A major part of the ethanol industry is the governmental subsidy of 51¢ per gallon that petroleum blenders receive in the form of a tax credit. Tyner’s study looks at variations of that subsidy: elimination, fixed per gallon, variable linked to crude oil prices, and a renewable fuel standard.
The economists say the subsidy adds about $1.60/bu. to the breakeven price that a refiner can pay for corn, and without the subsidy, corn prices would be less because ethanol production would be diminished. They say with the subsidy and high oil prices, ethanol is profitable since it is priced parallel to crude oil. Any reduction in demand for oil would be a reduction in demand for ethanol and corn prices would fall. The economists say, “With no subsidy, there is no ethanol production until oil reaches $60. However, by the time oil reaches $120, ethanol production is 12.7 BG. The renewable fuel standard is another mechanism for implementing a variable subsidy. Consumers pay at the pump instead of through their tax bill.”
Parallel with the higher ethanol production, corn production increases with higher crude oil prices, and Tyner says corn production for ethanol reaches nearly 12 billion bushels when crude oil reaches $120 per barrel. But ironically with the federal mandates promoting ethanol production, corn production reaches 12.68 billion bushels at $40 oil since higher oil prices diminish corn profitability. Their analysis says the 51¢ subsidy will push corn prices to $5.65 at $120 oil, and without the subsidy it would be $4.60 at $120 oil. They contend the federally mandated Renewable Fuel Standard does a better job of supporting corn prices because the subsidy at low oil prices is much higher.
At $120 oil, Tyner’s analysis shows the 51¢ subsidy would cause 52% of the corn to be used for ethanol production, and less than 1.5 billion bushels would be exported. Under that same scenario nearly $9 billion would be paid by the government to subsidize ethanol production. They conclude there are large differences in corn production, use, exports, and value all determined by the price of crude oil, as a result of the brotherhood between ethanol and oil. Consequently, the type of subsidy provided by the government to foster more ethanol use has a substantial effect on the corn market.
Summary:
With an increasing among of ethanol being produced from corn, and the ethanol impact on corn production, use, and value, there is a direct connection between the price of crude oil and corn. Higher oil prices will push up ethanol production, as well as push up corn production, use and value, and push down other uses such as corn exports. However the way the government promotes ethanol production through a variety of subsidies will also change the production and value of corn.
Posted by Stu Ellis at 12:12 AM | Comments (1) | Permalink
February 27, 2008
Even Though Hog Prices Are Low, Are They Worth Protecting From Further Decline?
Pork producers are faced with an unfriendly financial future. Slaughter is at record levels. Production does not seem to be declining. But pork prices are declining and profits have disappeared for most producers. Will pork prices continue to decline and if so, how do you manage that risk? Is this a time for Livestock Risk Protection insurance?
Extension economist George Patrick and two colleagues at Purdue have finished an evaluation of the Livestock Rick Protection (LRP) for hogs which has been on the market for nearly 5 years. He is quick to say that is an insufficient time for an insurance product to prove itself, however producers are using it to manage their price risk. Their evaluation was based on the net cost of the insurance, which is the premium minus the indemnities paid.
LRP only insures against the decline in the lean carcass price of the hogs below an established level of coverage, similar to a crop insurance policy. The producer would select a coverage level, and an endorsement length, which is the time from the purchase to the time the hogs are sold, and those come in choices of 13, 17, 21, and 26 weeks. That allows coverage of both feeder pigs and finished hogs. The carcass weight is assumed to range from 150 to 225 lbs, and is determined by computing 74% of the live weight. Coverage ranges from 70% to 95% of the contract value. There are numerous other details which a crop insurance agent can provide, or can be obtained from the USDA’s Risk Management Agency website for LRP. Coverage prices, rates, and ending values are provided by USDA here.
Values for the insurance are based on The Chicago Mercantile Exchange contract for lean hog futures, and producers who utilize the futures market for pricing will be familiar with the pricing mechanism for the insurance policy. The actual prices are reported by USDA’s Agriculture Marketing Service and those prices are used by the CME for settlement. So how do you know if you are eligible for an indemnity payment? Patrick says, “If the actual end value on the end date of the insurance contract is less than the coverage price selected, the producer may be paid an indemnity for the difference between the coverage level price and actual end value.”
Your cost of the insurance coverage varies with the length of the coverage, and since there is more price uncertainty over a longer period of time, then longer coverage is more expensive. The cost is also determined by level of coverage, just like crop insurance. The Purdue economists evaluated the LRP-Swine during 2007 and found that indemnities were paid just over 20% of the time and were under $1. The cost for the highest level of protection was $1.66 for a 250 lb. hog, but ranged from 1% to 2.6% of production values.
Does that amount of price risk protection satisfy your needs? That depends on the producer, and for some it will and for others it will not. Economist George Patrick says for the risk neutral producers who forego the LRP insurance, they “are likely to have a higher average return with greater downside variability.”
Summary:
High production costs and low market prices face hog producers over the coming year with the result of operational red ink. To protect against hog prices falling further, USDA offers Livestock Risk Protection insurance, which indemnifies a producer from market prices falling during a set period of insurance coverage. Once a coverage level and period are set and the insurance is purchased, producers who are risk averse can protect their price, but at the cost of the policy. Producers without the insurance could have higher profitability, but face greater downside variability in prices.
Posted by Stu Ellis at 12:06 AM | Comments (0) | Permalink
February 26, 2008
Will Ethanol Require Too Much Farmland?
First it was coffee shop talk. Then it was the market. Lately it was the USDA’s Outlook Conference. At this point there is little doubt that commodity prices are going to remain strong for a while. While beans and wheat try to protect their turf from the corn market, the battle for acreage at the Chicago Board of Trade is about as hot as your neighbors bidding for that 80 acres being auctioned down the road. Do we have a shortage of cropland?
Acreage constraints are being increasingly felt as domestic and foreign markets are demanding a share of the US Cornbelt. With the market rising daily in fear there will be insufficient acreage, USDA economists last week forecast a large increase in planted acreage expected for 2008. In his weekly newsletter, University of Illinois Marketing Specialist Darrel Good notes that USDA’s projection is for 225 million acres of corn, beans, and wheat in 2008, which is 7.4 million more than 2007. He says USDA’s calculation calls for fewer cotton acres, more double-crop wheat and bean acres, and some from the Conservation Reserve that is not renewed. But he said that 5.6 million still leaves a shortfall of 1.8 million acres, unless cattle are sold and pasture is converted to cornfields.
As you review USDA’s acreage projections the 10th PowerPoint slide summarizes the USDA forecast. Economists expect corn acres to slip from 93.6 million in 2007 to 90 million this year. Soybean acres are projected to increase from 63.6 million to 71 million this year and wheat is projected to increase from 60.4 to 64 million acres.
Along with the acreage estimates, USDA forecasts the national average yield at 154.9 bu., which Good says would be a 3.8 bu. jump from 2007. He believes the demand and carryout will be such that more than 90 million acres will be need to reduce the risk of a supply shortage and higher prices.
That is also the concern of a group of Iowa State University economists who’ve calculated commodity prices and biofuel subsidies and find that high commodity prices will result from continued intense competition for planted acres. The research authored by Bruce Babcock and colleagues, indicates that the demand pressure for corn acres has spilled over to soybeans and hay markets.
In one of the Iowa State theories, the corn ethanol industry expands until 18 billion gallons per year are produced, but only from corn and not from biomass products. That theory also suggests the soy biodiesel industry never gets off the ground without substantial subsidies. Their research also finds an equilibrium corn price of $4.76, soybeans at $13.01, and hay or switchgrass at $164.62 per ton, with 61% of acres dedicated to corn, 19% to beans, and 20% to hay or switchgrass.
The researchers conclude that competition for land ensures that providing an incentive to just one crop will increase equilibrium prices of all. They also determine that neither biodiesel nor switchgrass ethanol is commercially viable in the long run, and for it to be viable, it must be subsidized at a $1.55 to $2.11 per gallon rate, compared to $0.22 to $0.78 per gallon for corn ethanol. They contend the result will be more pressure for corn-based ethanol because of the requirement for a lower subsidy and corn takes less land to produce than switchgrass.
Summary:
As the competition for land increases, commodity prices go higher. With the increasing demand for corn to make ethanol, more land will be needed. Yet the federal mandates for biofuels shift the ethanol burden from corn to biomass, those cellulosic sources will consume even more land and require higher subsidies which may not be the best plan for the future.
Posted by Stu Ellis at 12:22 AM | Comments (0) | Permalink
February 25, 2008
This Little Piggy Went To Market, A Long, Long Way Away.
For years agricultural organizations have been promoting policies that will enhance exports, pushing the government to press for more market access, and conduct promotional campaigns in food markets around the world. Suddenly the world has come to the US for food, and in just 12 months export business exploded with a nearly 20% jump. $101 billion in 2008 export business was projected last Thursday at USDA’s Outlook Forum. Unbelievable!
It may have been little surprise to the worldwide audience at the annual event, but higher prices for feed grains, wheat, and soy complex products have pushed the estimated export value up $10 billion just since the last estimate was computed in November. The overall projection resulted from high foreign demand, low overseas stocks, sharply higher prices, and the exchange rate that favors the buyer.
Economic Outlook. The weaker dollar favors export growth, and even though domestic growth has slowed, global economic growth will remain about 3% for the year. Crude oil prices are expected to be 10% higher than 2007, with a 7-9% rise in fertilizer prices. US growth is expected to slow from the home mortgage financial problems and a recession. The dollar is expected to depreciate against the euro, yuan, peso, and real, but unchanged against the Canadian dollar and up slightly against the yen.
Export Products. Feed and grain exports for 2008 will be $32.7 billion, up more than $5 billion from last year, due to wheat and corn prices, as well as worldwide demand. But volume will increase along with value, since competitors have little to export and US supplies are ample. USDA says the record prices have not dampened export demand. In the soybean trade, both value and volume are up from last year, helped by growing sales to China, which is taking 40% of US soybean exports. Livestock and livestock product exports should reach a record $18 billion, which is 10% more than last year, with the help of more pork, beef, and broiler meat shipments. Horticultural products will also be up 10% from last year to nearly $20 billion.
Regional exports. Much of the $10 billion increase in the forecast from November is a result of higher prices, which means every region of the world will be sharing in the higher value of export trade. China will buy $8.4 billion in agricultural products, primarily soybeans and higher valued products. Japan will buy $11 billion in products, primarily commodity grains and processed foods. About 25% of exports will be going to Europe, Africa, and the Middle East, which is a 22% increase from last year. The Western Hemisphere will be buying nearly $40 billion, with 70% of the business destined for Canada and Mexico. They are the top 2 US markets and will buy more than $30 billion guided by NAFTA rules.
Import products. On the return trip, ocean freighters will be bringing back foreign foods for the US market, projected to total $76.5 billion in 2008, only a slight increase from last year. The greatest amount is an estimated $35 billion worth of horticultural products coming into the US, followed by $15 billion worth of sugar and tropical products, and $12 billion worth of livestock products and meats. On a per capita basis, Americans are consuming nearly 24 gallons of imported wines and beer, as well as 800 pounds of imported fruits, vegetables, and nuts, which make up 36% of the imported products. The pork producer would be interested in the changing dynamics with the Canadian hog trade. Southbound pork shipments will decline by $80 million, replaced by hogs for slaughter. There are disincentives in Canada for hog slaughter, and with higher feed costs, the hogs are coming into the US for finishing and slaughter. But the shipments are more than offset by lower beef and pork imports. USDA says the average price for imported food products was up 8% in 2007, and that will likely be the trend during the first half of 2008.
Changing dynamics. In the 1990’s the top US trading partners were Japan and the European Union, but the inception of NAFTA in 1994 has resulted in a shift to Canada and Mexico as our current top trading partners. Growth of exports to Asian is trending upward. The reasons for change include governmental policies, and shifting preferences for bulk commodities and for high valued processed products. Over 90% of imported agricultural products are processed and high value products. One of the increases is in grain products, such as biscuits, wafers, flours, and milled grains.
Summary:
Foreign economic growth and buying power, combined with diminished grain supplies abroad have brought the world to the US grocery store, and it will be carrying home more than $100 billion worth of agricultural products in 2008. That is a 20% increase from 2007, due to increases in both value and volume of US products being shipped. Some of the changes have resulted from government policies such as NAFTA, the growth in the Chinese economy, and the shifting of market preferences between bulk grain commodities and high value processed products.
Posted by Stu Ellis at 12:30 AM | Comments (0) | Permalink
February 23, 2008
Special Weekend Edition
The USDA Annual Outlook Conference was held Thursday and Friday near Washington, and anyone who has attended in prior years knows the value of the information provided. This special weekend edition of the farm gate blog will provide some flavor of the Outlook Conference and provide links to some of the presentations of greatest interest to Cornbelt farmers.
Following Keith Collins retirement in December as USDA’s Chief Economist his primary deputy Joe Glauber was named to that position in an acting capacity. Glauber’s presentation at the Outlook conference provided some insight into USDA’s expectations for 2008:
1) Planted acreage will reach about 252 million, up from 243 million in 2005, but still under the 1997 level of 261 million.
2) Soybean acreage will rebound to 71 million, corn acreage declines to 90 million and wheat continues its upward trend to 64 million.
3) Cash spring wheat prices have reached record levels above $18, with hard red winter above $11 and soft red winter above $9.
4) Global wheat consumption has outpaced output for the past 3 years. 2008 production may reach 650 MMT, compared to 600MMT in 2007.
5) Energy demand is driving corn usage, with ethanol taking 31% of production in 2008.
6) World oilseed demand continues to climb faster than corn demand.
7) Hog profitability has declined because of high corn prices. The hog-corn ratio that had reached 25 in 2005, will decline to 10 in 2008.
8) Slaughter cattle prices will remain steady with 2007 at $80. Slaughter hog prices will continue their 3 year decline to $40. Broiler prices will decline slightly from their 2007 high to $75/cwt.
9) Food prices are expected to increase 3-4% following a similar rise in 2007. Those increases are the highest since the nearly 6% rise in 1990.
10) Net cash farm income will exceed record levels again, reaching about $95 billion.
Under Secretary for Farm and Foreign Agricultural Services Mark Keenum presented his outlook on trade for 2008:
1) US exports will reach a record $101 billion in 2008, compared to $82 billion in 2007, and $76 billion in agricultural imports expected in 2008.
2) The agricultural trade surplus of $24.5 billion will approach the 1996 record of $27 billion.
3) US farm exports are driven by global demand, value of the dollar, renewable energy, reduced foreign competition, and changes in trade policy.
4) The greatest growth in global economies expected in 2008 are 8% in Asia and 6% in the Mideast and North Africa.
5) Among the top markets are Canada ($15.7 billion, +162%), Mexico ($14.5 billion, +190%), and China ($8.4 billion, +367%).
6) The US trade agenda is to complete the WTO talks, which may help reduce the 62% average world tariff. Comparatively, South Asian tariffs are 133%, and the US is 12%.
Pioneer HiBred President Paul Schickler was invited by USDA to address biotech seed issues in his presentation.
1) World production and consumption of corn has been at a steady upward climb, however yields peaked in 2004 and have declined the past two years.
2) Corn and soybean demand is driven by population and income. Over the past 10 years population has grown 13%, global income is up 35%, growth in meat consumption is up 25%, but the growth in the global crop acres is up only 4%.
3) Production must increase on existing farmland, or marginal areas will be pulled into production. Since 1980 global corn production has increased 68% with only an 11% increase in acreage.
4) Among new agronomic traits are drought tolerance (with 5-14% yield increase) and nitrogen use efficiency (with 10-25% yield increase in reduced N environments.)
Recent increases in commodity values have been blamed for causing substantial increases in food prices, but USDA ag economist Ephraim Leibtag's presentation at the Outlook Conference dispelled that rumor. An excerpt from his remarks indicates:
1) An 18 ounce box of corn flakes contains about 12.9 ounces of milled corn. Higher corn prices would be expected to raise the price of a box of corn flakes by 1.6 cents or 0.5%.
2) A 2 liter bottle of soda contains about 15 ounces of corn in the form of high fructose corn syrup. Higher corn prices would be expected to raise soda prices by 1.9 cents per 2 liter bottle or about 1%.
3) A pound of retail chicken uses 10.6 cents worth of corn or about 5.2% of the $2.05 average retail price for chicken breasts. Using the same corn data, retail beef prices would go up 14 cents per pound or 8.7%, while pork prices would rise 13 cents per pound or 4.1%.
4) Given that foods using corn as an ingredient make up less than a third of retail food spending, overall retail food prices would rise less than 1 percentage point per year above the normal rate of food price inflation when corn prices increase by 50%.
Many more of the presentations at the conference are available either by webcast of speeches or PDF of PowerPoint presentations. They are available here.
Posted by Stu Ellis at 8:54 AM | Comments (0) | Permalink
February 22, 2008
Extension Update
Extension Update is a weekly summary of news from Extension, government, and other attributable sources, focused on marketing, farm management, and other issues that are of interest to Midwestern farm owners and operators.
The acreage debate will continue, as will the debate about release of some CRP acres for crop production, suggests IL Extension’s Darrel Good. He says USDA expects an extra 6 mil. acres to be planted this year, but only 1.3 mil. from former CRP land and the balance from grassland and displacing minor crops. Read his latest marketing newsletter.
But Darrel Good says the USDA acreage estimates for 2008 were made at a time when corn carryover stocks were much higher than they are currently, and at a time when the corn yield was thought to be 4 bu. per acre more than it turned out to be. He says those factors could be important to the market in its bid to ensure sufficient grain supplies.
High grain prices will continue, says Marketing Specialist Melvin Brees at Missouri in his latest newsletter, “It appears that the tight supply situation for grain won’t be “cured” in the coming year and the outlook for favorable prices may continue. However, the balance between crops is critical to meeting demand needs and what happens to prices.” Read more.
Brees’ outlook for wheat is that, “Most estimates are that US acreage will increase to 61 or 62 mil. acres, which is up somewhat from last year’s 60.4 mil. This increase along with slower wheat exports would allow wheat carryover to increase somewhat from current very tight levels. Wheat prices may decline from re¬cord highs, but are likely to remain at historically good price levels.” He says US wheat stocks are at a 60 year low.
Regarding wheat, Marketing Specialist Jim Hilker at Michigan State says, “Projected 2007-08 world ending stocks were lowered another 1 MMT to 109 MMT, again, the lowest in modern times. The record upward price movement on top of the already record prices shows the world knows it is very short wheat and the market in making a run at rationing wheat. His balance sheet is available.
The bustling export business is due to the exchange rate according to Purdue economist Chris Hurt. “The European euro has increased in value relative to the US dollar by 40%. What that means is that with the same number of euros the Europeans can buy 40% more in the United States than they would have been able to buy three or four years ago.”
Chris Hurt says, “As an example, $12 soybeans in the Midwest are equivalent to $9 to the world at this point. This suggests that the world will not cut back on grain usage as quickly, because as buyers purchase using their own currencies they are not experiencing as high a price as we perceive these prices to be in the United States."
Maintain your typical production practices, even though commodity prices are higher. That is the advice of Kansas State’s Phil Sloderbeck who says variety selection, fertility, pest management, irrigation, timely planting and harvesting will still be the critical decisions between profit and loss. “Higher prices will lower economic thresholds, but they don’t eliminate the need for scouting and applying treatments in a timely manner.”
“As the stakes go up, it may be more important to make safe bets,” says Extension’s Sloderbeck. “Pay down the loans, purchase new equipment to improve efficiency and timeliness of practices, adjust fertilizer rates to rebuild soil that may have been mined during years of poor returns, pay more for improved higher yielding seed, update or improve equipment, and hire a crop consultant to improve pest management decisions.”
Hog slaughter is up nearly 11% since the first of the year, but MO livestock economist Glenn Grimes believes part of the reason that fewer hogs are dying from circovirus, and maturing to slaughter weight. But he says the breeding herd is only being reduced at a slow rate if at all, and the larger slaughter rate will continue through the third quarter. “If so, it will require an unheard of growth in live hog demand or death loss at a high rate from some other disease to get the kind of prices being offered by the futures market.”
The dynamics will change in beef production, believe Glenn Grimes and Ron Plain at MO Extension. They think more pasture will be converted to cropland and herds will decline because of high feed costs. “The size of the cow herd is likely to be reduced more than the size of the total cattle herd as beef producers shift more beef production to pastures, ranges and forage from corn. The probabilities are high that young cattle will be raised to higher weights on forage before they are placed on a high grain diet.”
Grimes and Plain rhetorically ask, “The beef cow herd in the six states of IA, IN, IL, MN, MO, and NE on January 1, 2008 was down 3% from 2007. This compares with the beef cow herd in the U.S. on January 1, 2008 being down 1%. Is this a sign that farmers are already starting to use some pasture acreage for crops rather than cows?”
Speaking of pasture, are you leasing pasture, and if so, how does your lease address the possibility of drought? NE Extension forage specialist Bruce Anderson says the landowner has the risk of having his pasture overgrazed and the value lowered. The tenant risks poor animal performance and health. He says decide ahead when to remove the cattle and adjust the rent, then put it all in writing to avoid any misunderstanding.
Save on production costs this year with some common sense. Ohio State ag engineer Randall Reeder offers a number of suggestions for cutting costs and raising profits:
1) Fuel costs for planting crops in reduced tillage is about half that of intensive tillage.
2) Using cover crops to capture N can cut commercial N purchases by 50-100 lbs/A.
3) Corn yields will be higher when rotated with soybeans because of N supplies.
4) Controlled traffic patterns save fuel, labor, crop inputs and equipment costs.
5) Better management of heating and ventilation in farm buildings saves energy cost.
6) Switching to fluorescent bulbs is expensive but saves energy and they last longer.
7) The average tractor tire is over-inflated and causes excess slippage and fuel loss.
8) Scheduled replacement of air and fuel filters saves fuel and increases power.
9) It is less efficient to keep an engine idling for warmth than it is to re-start it.
10) Don’t use a sub-soiler any deeper than necessary to break up compacted soil.
If your weed control strategy is too heavy on glyphosate, Ohio State weed specialist Mark Loux suggests, “Rotating Roundup Ready soybeans with Liberty Link corn is one way to avoid continuous postemergence use of glyphosate. Corn hybrids that contain the Herculex BT trait are also usually Liberty Link, since the gene that confers glufosinate (Liberty) resistance is a marker for the Herculex BT trait.” Choose one of these plans:
1) Apply a pre-emerge herbicide prior to crop emergence followed by a post-emerge application of glyphosate or Liberty. Apply the pre at 67%-100% of recommended rate.
2) With weeds at a maximum of 2-3” apply a post-emerge mixture of glyphosate and Liberty, plus residual herbicides, similar to those in the first approach.
What is the cost of this plan? Loux suggests, “Recent increases in the price of glyphosate products have pushed the cost of a standard glyphosate rate (0.75 lbs ae/A) upwards toward $10/A or higher. There is currently a rebate program associated with Liberty that reduces the price to about $9/A.” Read more.
What is the first year nitrogen credit for field corn following alfalfa? If you are trying to save on N costs, IL Extension crop specialist Jim Morrison says research in IA, WI, MN, and PA found an optimum N rate of 25-42 lbs/A. He says recent IL research found corn yields did not benefit from a nitrogen rate of more than 40 lbs/A.
If you are considering organic corn, Extension in IA, WI, & OH have studied the issues after surveying recent producers. Their farm size averaged 65 A., and 91% used it for livestock feed, and 9% for food grade use. Effective weed control was their major concern, most using multiple cultivation and tillage. Read more.
If biofuels are to be successful, subsidies must exist says an Iowa State study exploring their future. Ag economists calculated that to meet federal production mandates, corn will need a 22¢ to 78¢ subsidy, biodiesel will need $1.97 to $2.90, and cellulosic ethanol will need to be subsidized $1.55 to $2.11. They contend the federal mandates may create more of a food versus fuel debate, since corn will need a lower subsidy than switchgrass.
Food prices have not been forced up by ethanol say NE economists because grain prices are a function of the world market, and farmgate values for food are only 20% of the food dollar. The balance is for processing, packaging, transportation, etc. Since the value of corn used in domestic food production is only 16% of all farm production, then 16% of the 20% received by farmers is only 3.2%, hardly enough to inflate food prices. Their rationale is available.
Consider an agri-tourism venture for people who will pay to visit your farm. It increases farm revenue; makes use of under-utilized resources, can convert a hobby into a business, and even help early retirement. Get more information.
Posted by Stu Ellis at 12:49 AM | Comments (0) | Permalink
February 21, 2008
If You Have Made Your Cropping Plans, It Is Time To Book Your Profits.
Are you planting more corn or more soybeans than last year? Are you planting equal amounts? Are you changing your cropping patterns at all? The market is certainly bidding for your acres, based on a variety of fundamental forces that are pushing and pulling on Cornbelt crops.
Cash corn is at the $5 mark at some locations. March soybean futures are nudging the $14 mark, which Purdue marketing Specialist Chris Hurt says is overpowering the corn market. In his latest newsletter for soybeans, Hurt says expected returns per acre are nearly $30 higher for soybeans than corn on average Midwestern soils. Subsequently, he’s expecting the USDA’s Prospective Plantings Report at the end of March to show excessive soybean acreage planned for 2008. If so, that would be bearish for the bean market, and would make farmers who forward contracted beans prior to March 31 look pretty smart.
Some of the fundamentals to be watched in the soybean market include exports, which are running ahead of last year and the old crop carryout which is down to only 19 days of supply. Reports about the South American soybean crop will soon be confirmed, along with reports of adverse weather that may hurt the crop size.
Sellers of soybeans have usually had good opportunities in the March to May window, and Chris Hurt recommends moving to 40% of old crop beans sold by that time, moving up to the 80% level before the end of May. For the new crop, Hurt suggests being 30-40% sold by June. While Hurt has suggested that soybean prices may reach $15, he urges farmers to utilize crop insurance to protect that revenue opportunity, despite higher premium costs.
As noted previously, Purdue’s hurt believes corn prices are too low, relative to soybeans and he believes corn acreage will drop 5% from last year if it does not increase 20¢ to 30¢ per bushel. But right now, he’s betting the March 31 plantings report will predict corn acreage to be far too low, according to his latest corn marketing newsletter.
The export market remains positive for corn despite the current prices. While the livestock producer has financial stress, there are few signs of a cutback in production. And Hurt says the carryover into the 2008 marketing year will be tight and will keep prices high.
To take advantage of those prices, Hurt wants farmers to consider using the February to May period for reaching the 80% sold level, and having 30% to 40% of the new crop forward contracted by planting time. He’s concerned about the potential for warmer and dryer weather this growing season. Given that fact, Hurt is pushing farmers to consider revenue style crop insurance to protect pricing opportunities, despite premium costs.
Supporting Chris Hurt’s concerns about having sufficient supplies of the right type of grain is Missouri marketing specialist Melvin Brees. In his latest marketing newsletter Brees says the market is trying to reconcile the needs of processors in 2009 with acreage and yield yet to be determined in 2008. And that debate over acreage will impact every corn and soybean producer in the Cornbelt. Brees also points to the March 31 Prospective Plantings Report as an indicator of how well the market has convinced farmers of how much acreage to devote to corn and soybeans. But the success will not be known until the report is released.
A year ago, the market had to flip-flop between the intentions report and planting time, or an insufficient amount of corn would have been produced in 2007. The market adjusted after the report, and Brees says 93.6 million acres of corn were planted with nearly the entire amount expected to be consumed in the current marketing year. He says corn cannot afford to give up many acres to beans in 2008, even though soybean use will exceed production in the current year and more soybeans will be needed in 2009.
In the middle of the corn and soybean acreage battle is the wheat market, which has the smallest supplies in 60 years. But less wheat was planted than the marketing expected, so prices remain high, which Brees says should entice spring wheat producers.
Worldwide, grain stocks are low as economies grow and increasing populations demand more and better food. That dynamic, combined with the low value of the US dollar, has fostered exports to levels that will reduce US stocks to low levels. And Brees says that will signal continued strong prices.
Summary:
Tight world supplies of grain, which result in increasing US export business, have caused domestic stocks to decline as well. The US market is bidding prices higher, buying acres for corn and soybeans in particular, but also for spring wheat. Consequently, prices will remain strong until the Planting Intentions report, which may indicate excessive acreage of one crop and insufficient supplies of another. The timing of the report, estimates of Brazilian soybean production, and the annual spring bounce in the markets will combine to provide farmers good marketing opportunities in the next few months.
Posted by Stu Ellis at 12:09 AM | Comments (0) | Permalink
February 20, 2008
Crop Yields: Do They Result From Seed Genetics Or The Weather Or Something Else?
If your crop yields are accelerating more each year, is it because you are paying your seed dealer, or paying the preacher? In other words, if you are experiencing yield improvements at a higher rate than ten years ago, is that change due to the technology in the seed bag or the fact that Cornbelt weather has been more favorable? Or is there any yield acceleration at all?
Crop weather specialist Mike Tannura at the University of Illinois was joined by agricultural economics colleagues in looking at the yield trends and the weather in Illinois, Iowa, and Indiana, all of which have similar crop production practices, similar weather, and produce about 50% of the corn crop. Their analysis looks at the widespread perception that trendline yields have accelerated since the mid-1990’s, compared to the longer trendline yield from 1960 to 2007. They looked at precipitation both pre-season and growing season, as well as temperature, and utilized some of the longtime efforts of Iowa State weather specialist Louis Thompson.
Since 1996 they found that the trendline for corn yields changed very little in the three states and at most .2 bu. which was described as statistically insignificant, after adjusting for the weather. They characterized the weather as fairly benign for corn development since the mid-1990’s. Similar to the yield jump from single cross hybrids in the 1930’s and the reliance upon nitrogen fertilizer in the 1950’s, many folks in agriculture attribute yield increases to improved seed technology. That would include triple stack corn which has only been yield tested for 1 year, and the speculation that Bt corn genetics also improve its use of nitrogen.
(Along the way, the researchers found, “Unfavorable weather reduced yields by a much larger amount than favorable weather increased yields. For example, 2 inches higher than average July precipitation in Illinois increased corn yields 6 bushels per acre, while 2 inches less than average reduced yields 16 bushels per acre.” They also found that, “Corn yields increased at the fastest rate in Iowa and Illinois, with annual increases of 2.1 and 2.0 bushels per year, respectively. Trend yield increases in Indiana were slightly lower at 1.7 bushels per year.”)
Their statistical analysis indicated both that seed technology and weather really did not fully explain any yield improvement in recent years. However, they measured about a 1 bushel per acre increase attributable to the change to single cross corn, and a 1.7 bushel per acre increase attributable to nitrogen use. They were intrigued that biotech seeds may also result in a yield increase over the period of 2008 to 2030, but one that is closer to 225 bushels per acre instead of 300 bushels per acre. But leaving a question mark in their minds was whether cyclical weather patterns may also at work as Dr. Thompson had suggested.
The Tannura, Irwin, and Good analysis was part of more lengthy research which focuses on the relationship of crop yields and crop weather statistics that will be of concern if there are increases in global temperatures.
Tannura and colleagues note that analysis of weather impacts on crops can be difficult, given the fact that 4 inches of rain in a month could be spread over several showers, or could be just one gullywasher. They looked at weather studies back to 1914, which determined July rainfall was the most important for corn, and another in 1920 which said temperature played an important role. Following up on Thompson’s statistics which spanned 1930 to 1962, Tannura’s group explored the potential for yield acceleration since 1960 and including the new biotech period.
Tannura says, “The states of Illinois, Indiana, and Iowa were chosen for the present study because they represented 43% to 45% of U.S. corn and soybean production from 2000 through 2006. These states also have similar climate and planting dates. Consideration was given to including Minnesota and Nebraska since they often rank in the top five corn and soybean producing states. However, Minnesota was excluded because its northern climate is more susceptible to damaging early- and late-season frosts that may not be detected by monthly weather observations. Nebraska was excluded because a high proportion of its crops are irrigated, which skews weather-yield relationships.” Among the findings are:
1) Indiana is the wettest during the pre-season, which is defined as total precipitation from September through April.
2) Illinois is drier by a small amount.
3) However, Iowa averages approximately 6.00” to 8.00” less during the pre-season period. This is primarily due to considerably drier weather during the winter.
4) Precipitation during June in Illinois and Iowa both averaged around 4.00”, which was slightly drier than in May.
5) However, Iowa averaged 0.50” more precipitation than in Illinois or Indiana, which was slightly wetter than in May.
6) A review of the median also shows Iowa was the wettest during June. At the extremes, Illinois and Indiana have been much drier than Iowa in June with minimum values of 1.05” and 0.74”, respectively.
7) Illinois was the warmest of the three states throughout the growing season from May through August, while Iowa was always the coolest.
8) The month of May was the coolest with average temperatures around 62°F to 63°F, while July was the hottest with averages around 74°F to 75°F.
Regarding yields, corn yields climbed quickest in Iowa at 1.9 bu. per year, with Illinois and India at 1.7 bu. Soybean yields increased by 0.5 bu. in Iowa and Indiana, with Illinois at 0.4 bu. “Yields from 1960 through 2006 were adjusted to the level of technology available in 2006. Iowa averaged the highest de-trended corn yield, 159.1 bushels per acre, followed by Illinois at 155 bushels per acre and Indiana at 149.6 bushels per acre, respectively.” Tannura’s group also reports, “Monthly precipitation and temperatures during sensitive periods of crop development were stable across the sample period. Although precipitation and temperature observations showed large year-to-year variability, a clear trend was not detected. The lack of a trend and earlier evidence of low month-to-month correlations support the view that monthly temperatures and precipitation from 1960 through 2006 were random. Finally, the fact that an upward trend in temperatures was not observed in Illinois, Indiana, or Iowa is not necessarily inconsistent with global warming, because the local effects of global warming on climate and weather are poorly understood.”
Summary:
The perception that trend yields have accelerated in the past decade could be due to benign weather that was not recognized, or due to an improvement in seed genetics, or due to weather patterns that cycle through with beneficial effects and a year to year decrease in yield variation. Precipitation, temperature, and time can explain the increasing yield curve, but trend yield forecasts based on technology may lead to poor yield forecasts.
Posted by Stu Ellis at 12:29 AM | Comments (0) | Permalink
February 19, 2008
The Farm Economy: From The 30,000 Foot Level
Marketing plans, crop budgets, and operating loan renewals may be on the top of your priority list, and if so, what numbers should be plugged into those spreadsheet variables? The economists at Michigan State University offer their assessment of the farm economy and you can find the essence of their work right here.
Marketing Specialist Jim Hilker and his colleagues have compiled a lengthy analysis with the background you need to complete some of those reports that will soon be due.
The general economy
US economic growth has stalled with only a 2.2% GDP in 2007, and many economists are forecasting a recession in 2008. Unsavory factors include unemployment, housing starts, mortgage defaults, and the federal deficit. Consumer and producer prices are rising which hints at inflation. But interest rates have declined, and may be forced down further. An economic stimulus check will be mailed to many taxpayers. Areas that depend on a strong agricultural economy are being rewarded.
Farm input costs
1) Increased demand for fertilizer and the fact that many ingredients have to be imported have pushed prices upward because the US dollar does not go far in paying for them. Phosphate is in the $700 per ton level, along with anhydrous ammonia. Potash is at $450, but that is up $200 from last year.
2) Seed supplies are tight, with Triple Stack Roundup Ready corn at $205 per bag, Cruiser Max soybeans at $50 per bag, and wheat seed at $15 per bag; and popular varieties are selling out.
3) Fuel costs continue upward with a 123% hike in diesel fuel since 2003 and spring prices will be $3.00 for diesel. That could go higher with devaluation of the dollar, but a global slowdown will drop oil prices, and that is at crosscurrents with the rest of the economy.
4) Interest rates are declining, but the picture of the future is foggy. Large rate cuts have recently occurred, but could increase if inflation concerns set in. Even with low interest rates, credit is tight, and banks have concerns about defaults.
Land values
Cornbelt land values are all trending up, but geographic variations certainly exist, despite a 20 year upward move. Consequently, cash rents continue an upward march, reflecting strong commodity prices. Farmers could see record earning levels, barring weather problems. Profitability continues to be a function of energy prices, which impact both crop inputs and the ethanol market for corn. Government payments have contributed to high net income, which has been put back into the land market. With long term interest rates at low levels, additional borrowing has occurred by farmers wanting to buy land.
Farm policy
The House and Senate continue to wrestle over their respective versions of the Farm Bill, which must be soon approved. Neither facilitate the integration of the world trade rules into US farm policy. In some form, both houses use elements of the 2002 Farm Bill’s commodity programs to provide price support mechanisms. The House has a national average price that determines a counter cyclical payment while the Senate uses a more localized average price. A continuation of direct payments plus the Senate’s demand for a permanent disaster aid program are among the significant elements. Both bills keep the CRP program in tact. The Congressional proposals also keep the PL 480 food donation program and the Market Assistance Program, which have drawn serious fire from other nations. Another policy initiative is the implementation of the Country of Origin Labeling program for retail meat products.
Trade
The outlook for trade will be determined by the strength of the dollar, which is also indicative of the strength of the general economy. Declines in its value have brought many buyers to US commodity markets, but have troubled US buyers of foreign products, such as oil and fertilizers.
1) The exchange rate is a product of interest rates (low interest does not attract foreign investment), the inflation rate (investors do not want inflated dollars because they buy less), rate of income growth (wealthier consumers will demand imported products), psychological factors (the confidence the investor has in the country and its currency), and government intervention in markets (a country must be ready to support its currency.)
2) Changes that occur in the exchange rate will impact trade, either increasing or decreasing it, and reduced trade implies a lesser demand for grain and other commodities that are typically exported. But depreciation of the dollar will also result in higher prices for US buyers of imported goods. For 2008, the Michigan State outlook is for a continued weakening of the dollar into 2011, before recovering by 2020. Exports will be healthy, but inputs will be expensive.
Corn
The outlook is for volatility for several years into the future. The greatest changes will result from the amount of domestic and foreign ending stocks, but smaller price variations will occur throughout the year. Coming into 2008 with the largest corn crop ever, prices are still in the high $4 range. That means the market is worried there is insufficient supply to meet the demand. The 88 mil. acres expected to be planted in 2008 is the minimum needed to meet demand from biofuel operations, livestock feedlots and exporters. Livestock feed use will fade but ethanol use will grow over 1 billion gallons from last year. But soft profits are slowing the rate of ethanol plant expansion. Exports will be the highest in 3 decades, helped in part by the lack of cheap feed wheat. A 140 bushel crop in 2008 would mean $6 corn, but a 160 bushel crop would mean $3.50 corn.
Wheat
World demand is strong because of the lack of supply, and the market is bidding for acres for wheat. Less than stellar crops both in the US and around the world have dropped the supply and increased the demand. A trend yield in the northern hemisphere will still mean tight stocks. Exports are up 30% from last year, but should fade from that level next year. Historically high prices will continue, and could be even higher with small changes from what the market expects.
Soybeans
Demand is strong, but supplies are down from mediocre crops and mediocre acreage and there are not enough stocks to offset a poor 2008 crop. The US planted fewer acres in 2007, but a record carry-in kept the supplies from running out. Crush demand is strong even with competition from DDGS. Six million additional acres are needed in 2008, but it is uncertain where they will come from. High prices will ration soybeans and soy products, keeping the average price at $10 per bushel.
Livestock
1) Hog slaughter has been at a record high and prices reflect the over-supply. Production will be up 6-9% this year and lean hogs will remain below $50. Pork demand, with the help of exports, is expected to stay strong.
2) Cattle numbers are static, but shifting within categories. Higher calf prices signal a continued expansion, although the calf crop was smaller. Beef production is expected to remain steady with most of last year.
3) Dairy prices hit record highs in 2007 with low European production and the exchange rate that benefited the buyer. Even with high feed costs, dairy operators made money with an income over feed cost of $14. Milk prices have faded and dairies will be squeezed to the point that some will exit the business. With higher prices for milk and soybean meal, dairy profits will depend on opportunistic feed purchases.
Summary
Farm budgets and marketing plans have to be fully integrated this year. Crop marketing plans will be difficult to develop because of the high production costs. Livestock marketing plans will be difficult to develop because of the high feed costs. However, lower interest rates will offset higher energy prices, and the export trade will keep commodity prices high along with biofuel demand. Any plans to expand or change profit centers will have to take general economic factors into account.
Posted by Stu Ellis at 12:32 AM | Comments (1) | Permalink
February 18, 2008
As USDA Polishes Its Crystal Ball, Take Notes, And Plan Your Own Future
Ten years from now is a long time away, but it you are running a multi-million dollar business (3,000 acres of corn and soybeans qualifies) that should be your planning horizon. Your ten year plan should address cropping and livestock enterprises, expansion plans, and transition plans. Late last week Chairman Colin Peterson of the House Agriculture Committee proposed switching to a ten year Farm Bill. Earlier in the week the USDA released its ten year forecast for the agricultural economy. Are you in step?
It is easy to say that is too far ahead to plan, but if some reasonable forecasts for commodity prices, production costs, and government programs are on the table for your use, maybe it is time to assemble your own ten year program. The assistance from USDA came with the qualifier that uncertainties exist, but that is part of the plan. We can only give you a glimpse of the projection here, but the entire report is available. You may not pay much attention to the global barley trade, but the future of agriculture depicted by the USDA baseline report will help you frame your operation for sustainability.
The USDA economists had to make certain assumptions. Those included:
• Continuation of farm policy and the recent biofuels mandates
• World economic growth about 3.5%, and population growth about 1.1%
• Depreciation of the dollar through 2011, then slow appreciation to 2017
• Decline in oil prices through 2013, then increasing faster than inflation
Macroeconomics: Steady world economic growth will help commodity prices and consumer demand says USDA. The current high level of farm income will decline slightly but remain strong in the ten year period, helped more by the market than government programs. Export values remain high, helped by a low dollar value. Domestic consumer demand continues with food prices increasing less than the inflation rate. Strong economic growth in China and India will be important in the global economy, with Asia claiming 30% of it by 2017. Population growth will be important in food and biofuel demand. Global inflation is expected to average 3% through 2017, managed closely by central bankers. The crude oil market will fluctuate, but prices will be pressured by alternative sources of energy, including a growing supply of renewables.
Crops: Ethanol production will impact about every aspect of the crop sector. Global economic growth and new uses for crops will support increased consumption and keep prices at high levels. Global economic growth will also create more demand for meat and support trade in feed grains. However, domestic ethanol production and the need for soybeans as well as corn will restrain the potential for increased export business. Corn remains king, in terms of acreage, exports, livestock feed and ethanol demand. The CRP will be reduced by lack of re-enrollment, but then expand maximum levels with higher rental rates reflecting demand for acreage. Planted acreage will reach a high of 252 million in 2008 and level off to 244 million through 2017. Corn will capture more than 90 million acres, soybeans will fade to under 70 million, and wheat acreage will rise to meet short term demand then fall to 56 million for the long run.
By 2017 ethanol will convert 5 bil. bu. into 14 bil. gal. Federal and state incentive programs will be important, as will high oil prices. High values of corn will push some domestic and foreign livestock to wheat for feed as corn exports fall due to high prices. Wheat exports will be steady, but fade from competition approaching 2017. When ethanol consumption of corn levels off, export business returns from the world demand for feed grains. Higher per acre profits for corn will cause soybean acres to fade, subsequently soybean exports fall and Brazilian exports rise. The domestic crush will remain strong from the demand for both meal and oil. Corn prices rise through 2010, then decline as ethanol production slows, but the growth in exports will keep stocks low and prices will remain historically high. Soybean stocks will remain at low levels and prices will remain high through 2017. Wheat prices initially decline as stocks rebuild, then less acreage and lower stocks will push prices higher.
Livestock: Production adjustments will result from high prices for corn and soybean meal. Profits will be under prior levels with resulting declines in production. After that period of adjustment, the livestock sector will grow from domestic and export demand accompanied by higher prices and profits. Consumption will decline from price increases, then increased production will be met with lower prices and increased consumption. High grain prices will initially depress beef production, but the herd will be rebuilt with higher slaughter weights. Pork production will initially decline from high feed costs, and then grow as prices recover. The linkage with the Canadian hog industry will grow increasingly complex. Poultry production will initially decline from high feed prices, but will recover with the help of increased exports. Meat will benefit from export demand, but beef exports to the Orient grow only slowly. Strong pork demand will come from the Pacific Rim, helped in part by growing economies in India and China. Recent high profits for dairies will spark more production through 2009, but curtail as profits decline. Efficiencies continue as output increases. Milk prices will rise, but not keep up with inflation.
Farm economy: Domestic and global economic growth will support gains in consumption, trade, and prices, helped both by population growth and the biofuel industry. Market prices will rise along with cash receipts, but higher production costs and lower government payments will keep income in check to some degree. Net farm income will remain strong, climbing from $90 billion in 2008 to over $100 billion in 2017. Exports values will be high in the latter part of the period, but domestically, food prices will rise less than the rate of inflation. Program payments to farmers will fall to less than $10 billion through the balance of the ten year period as a result of high commodity prices, and will be less than 3% of gross cash income for most of the next ten years.
Production expenses: Production cost increases will be less than the inflation rate through 2017. The greatest increase in cost will be in the area that includes rent paid to landowners, interest, and labor costs. With the help of stable oil prices, the cost of manufactured goods will increase moderately through 2013, then increase more rapidly as higher oil prices prevail. As corn prices stabilize the cost of farm produced inputs, such as feed and seed will also stabilize.
Trade: Globally, increased grain consumption has eroded stocks and raised prices. World economic growth will move consumers toward diversified diets from basic foods; but population growth will occur where staples are the primary foods. US exports will be significant, but challenged by competitors even with the low value of the dollar. The US will continue to be the world’s primary source for corn, and China will settle in as just a corn importer. Food demand will support vegetable oil prices at a high level, but biodiesel will compete for it. Wheat will continue to be a volatile-priced commodity because of weather-related production problems. The value of US farm exports will grow to over $100 billion by 2017, helped by the value of the dollar, but primarily driven by growing economies and hungry populations with money to spend. Recent high commodity prices have strengthened bulk export values, but in the long run the value of high valued exports such as meats and horticultural crops will prevail. The agricultural trade balance will begin the ten year period with a $15 billion surplus, but that will erode by 2017 as imports increase and bulk exports remain flat.
Summary:
The best guess of USDA is for a strong agricultural economy for the next ten years. A growing world economy and population will demand food, meats, and biofuels from the US marketplace. Competition among grains for limited acreage will keep prices high in the wake of the demand. Moderation in oil prices will help the world economy grow, but also keep production costs in check for much of the next ten years. Farm income will grow with the help of biofuels, demand for grain and livestock, and a healthy export trade.
Posted by Stu Ellis at 12:34 AM | Comments (0) | Permalink
February 15, 2008
Extension Update
Extension Update is a weekly summary of news from Extension, government, and other attributable sources, focused on marketing, farm management, and other issues that are of interest to Midwestern farm owners and operators.
Grow more. That is your assignment from the marketplace, says IL Extension Specialist Darrel Good, who says USDA’s latest projections for demand and carryover stocks point to the need for large 2008 crops. Wheat, for example, will have the smallest carryout in 33 years, but exports are at a 12 year high, says Good. Read his latest newsletter.
For soybeans, export projections are more than 1 bil. bu., and slightly under last year’s record. The projected crush will set a record, and carryout will be 5% of consumption, which is the least in 35 years. Darrel Good says the new crop needs to be 2.9 bil. bu., and with a trendline yield, that requires 69 mil. planted acres, which is 5.4 mil. more than ’07.
For corn, the export pace is at 15% more than last year, and some foreign crop estimates have declined. Good expects 13.255 bil. bu. to be consumed, which is more than USDA projects and that would reduce exports and livestock feeding. He says to reach a 13 bil. bu. new crop from trendline yield, 92.4 mil. acres are needed, just 1.2 mil. less than ’07.
For wheat, world production is expected to rebound and US exports will decline, but to keep stocks at the current low level, 63 million acres are needed with a trendline yield. That is 2.6 mil. acres more than last year, and with winter wheat seedings up about 1.6 mil. acres, Darrel Good says that implies the need for 1 mil. extra acres of spring wheat.
The acreage battle will increase in 2009 and 2010 says Iowa State Marketing Specialist Bob Wisner. He says corn supplies will remain tight, despite declining soybean acres. Commodity prices will be sensitive to US and foreign weather concerns, and Wisner says grain buyers will stop offering forward contracts for crops beyond 2008. His charts are available here.
Bob Wisner expects grain farmers to find option markets more important than in the past as a means of managing volatility. He acknowledges that options are expensive, but says out of the money strike prices can provide upward price flexibility. Wisner says the basis should strengthen later this year, but that creates a high price risk for livestock feeders.
The early ‘70’s brought a $2 increase in corn prices, and the beef cow inventory lost 8.65 mil. head. But Iowa State’s John Lawrence says that probably won’t happen this time, even though Cornbelt pastures are being planted to corn and Cornbelt states account for 57% of the decrease in beef heifers in USDA’s Jan. 1 cattle inventory. While some pastures are drought stressed, Lawrence says corn is a bigger influence. Read more.
Questions continue to be raised about USDA’s Feb. world crop analysis, and Mike Woolverton at Kansas State notes that no change was made in Brazilian soybean estimates. “Persistent rain in the North of Brazil has increased damage from Asian Rust and has delayed harvest. The South of Brazil has turned dry at a critical time in pod fill. As this uncertainty is reduced by the Brazilian soybean harvest in the next month or so, look for changes in future (USDA) reports concerning the size of Brazil’s soybean crop.”
Woolverton underscores Darrel Good’s call for a large crop, but worries about the US weather, “The drought in the Southeastern US continues and it is dry in the Southern and Western Great Plains. Most people think it is too early to talk about yield impacts. But, we will need nearly ideal weather for crop development this spring and summer for production to satisfy projected demand. Weather scares in spring and summer could cause price fluctuations even greater than we have experienced this winter.”
The wheat market at the Minneapolis Grain Exchange was in a 90¢ trading limit rule, with $1.35 the next limit, if futures contracts continue their volatility. South Dakota marketing specialist Alan May says, “It appears that SD spring wheat producers are anticipating a reduction in spring wheat acres due to better revenue from corn and a compelling argument over the challenge of managing head scab in spring wheat.”
Alan May says, “With the successful transition to more soybean and corn acres in ND, it would seem likely at this point that a growth in spring wheat acres will not occur. However, if wheat prices continue to move higher, there is the likelihood that wheat will be very competitive from a net revenue standpoint.” The MGE contract exceeded $18.
May says the market may break. “The day or days will come when hard corrections will come into this market but the foundation of very tight supplies will likely provide more than sufficient support to keep wheat prices from a free fall to pre-August levels.”
Wrong market signals may be impacting the hog industry warns Glenn Grimes at Missouri. “Unless hog slaughter is sharply lower than now indicated or we have spectacular growth in demand, live hog prices in 2008 are likely to average in the low $40's. Our concern is that the futures market indicated prices may provide signals that the herd does not need to be downsized much, if any, from the current level of production.”
Beware of porcine circovirus, which has been around for 40 years in an innocuous version, but recently has mutated, combined with other pathogens, and is raising the mortality rate 35 to 50%. A Purdue virologist believes it may have originated after combining bovine viral diarrhea virus with other swine viral diseases.
If you don’t like soybean aphids, turn off their salivary glands. That is the finding of Kansas State researchers, who discovered that genetically neutralizing the salivary glands of aphids will shorten their life 50%. They said saliva plays an important role in the damage to a crop, and billions of dollars worth of crops could be saved as a result.
A new corn nematode has been discovered in western TN, which MO nematode experts are comparing as much worse than soybean cyst nematodes. It matures much sooner than SCN, and creates 25% more cysts. It likes sandy soils best, reproduces the best in 81 degree soils, but three out of four will not survive winter soils as low as 18 degrees.
Recent heavy rains threaten the wheat crop say Purdue agronomists, “These very wet soils coupled with the alternating freezing and thawing that has occurred in recent weeks and may occur in the coming weeks, makes the possibility of heaving very likely.
When wheat breaks dormancy, Purdue recommends a topdress. “Assuming that 20-30 lbs. of nitrogen were applied at seeding time, the rate of top-dress nitrogen is directly related to yield potential. With a yield potential of 50 bu. per acre, we recommend 40 lbs. of N as a topdress, at 70 bu/ac we recommend 60 lbs. of N and at 90 bu/ac, 90 lbs. of N.”
Adjust your N application based on prices says NE soils specialist Charles Shapiro, “Nitrogen and corn prices have typically been in the 8-to-1 to 10-to-1 corn-to-nitrogen ratio. UNL nitrogen recommendations were designed to be most economical in that range. With March corn at $5.07 per bushel and nitrogen prices at about 50 cents per pound, the corn-to-nitrogen price ratio is at the recommended 10-to-1 range.”
Nitrogen and phosphorus prices continue to climb, but natural gas prices are not solely to blame says NE soils specialist Gary Hergert. It is really the value of the dollar. “With fertilizer being a worldwide commodity, the US must compete with other buyers. The weak US dollar makes fertilizer more expensive for US producers." The US imports 75% of its urea nitrogen fertilizer. But 25 US ammonia plants have closed since 1999.
“No consistent statistical yield benefits.” That was the outcome of an exhaustive WI survey about the use of foliar fungicides on corn. Without it, there was more stalk lodging but that did not mean yields were less. The agronomists say crop rotation, hybrid selection and residue management should be considered important preventative practices.
The March 15 deadline for crop insurance is quickly approaching, and Kansas State crop insurance specialist Art Barnaby has provided a multitude of historical records about market prices, to help evaluate the necessary decisions. They are located here. However, the corn price chart indicates 23 out of 35 years, prices were higher in the spring than in the fall. For soybeans, the better price was found in the spring in 20 of the 35 years studied.
In case you have forgotten, the Farm Bill remains incomplete, and a Conference Committee has not even been fully appointed to reconcile the House and Senate versions. Knowing the versions are far apart and the White House has threatened to veto both, the House leadership has proposed a 10 year compromise, $6 billion more expensive than the last version. Interestingly, the top USDA leaders say the President would agree to it.
Posted by Stu Ellis at 1:41 AM | Comments (1) | Permalink
February 14, 2008
2008 Farm Income. A Rosy Picture For Nearly Everyone.
On the whole, farm income in 2008 will be up substantially, because of a 17% increase in crop income. But hidden in that USDA forecast is a 2% decline in livestock income. That is the essence of USDA’s expectations for agriculture this calendar year, but what about the facts? We’re glad you asked!
USDA’s Economics Research Service says the 2008 farm economy will be driven by a strong demand for feed crops, oilseeds, and food grains. The ERS projections call for agriculture to contribute $144.1 billion to the national economy, a 38% increase over the ten year average. Net farm income will be $92.3 billion, up 4.1% over 2007, and 51% over the ten year average. Net cash income is expected to rise $9 billion to $96.6 billion because of the large carryover of 2007 crops sold in 2008.
The big news is crop production being estimated at $175.5 billion in value, up 17% over 2007 with the help of high commodity prices for corn, beans, and wheat. Over $90 billion is from feed grains and oilseeds. However, the other shoe falls with the livestock projection of a 2.7% decline in cash receipts. That is an abrupt change, following the 22% increase between 2006 and 2007. USDA forecasts market value declines in all livestock species, except level receipts for sheep and lambs, and a .1% rise in the value of miscellaneous livestock.
Higher farm income is a function of higher commodity prices, resulting from a strong demand for grains and oilseeds used also in the bio-fuels industry, as well as a strong export demand. The decline in global stocks fostered the export demand along with a decline in the value of the dollar, which lessened the relative cost of US commodities.
Along with higher commodity prices are higher production costs. Those expenses are expected to exceed the 10 year average by 34%, offsetting the increased income. Net cash income will be up over 10% from last year. ERS says, “Net cash income (cash income earned after out-of-pocket expenses) is money available to pay debt obligations, taxes, and family living expenses. It is an indicator of the farm sector's cash flow and liquidity.”
Production expenses rose over 10% going into 2007, and will rise another 9% going into 2008. If they rise as expected, production expenses will equate to 75% of gross farm income and the 6th straight annual gain. Among the higher expenses:
1) feed expenses (feed grains and soymeal) will be up more than 18%.
2) Seed expense will be up 4%
3) Fertilizer will be up 18% after a 20% rise a year ago.
4) Fuel and oil expense will be up more than 12%.
Payments to land owners, laborers, bankers, and other stakeholders will be up nearly 6% from last year. Direct government payments will be up $13 billion from last year, but 20% below the five year average.
The past 4 years have provided exceptional earnings for most of agriculture, with net farm income setting records in 3 of 5 years. But the picture is not rosy for everyone. While the Cornbelt is the greatest beneficiary because of corn, bean and wheat income, the southeast and Mountain states are suffering drought and will have less to sell. A cold Florida winter hurt the citrus crop, and despite the lack of assessment, revenue will be down.
Summary:
Most measures of agricultural earnings predict that 2008 will be a banner year, with higher expectations for net income and higher commodity prices. But production costs will be up substantially, particularly for feed, seed, and fertilizer. But along with the higher costs for feed grains, is an expectation for lower income from livestock operations.
Posted by Stu Ellis at 12:39 AM | Comments (0) | Permalink
February 13, 2008
Ethanol Is Here To Stay, So What Does That Mean For Acreage, Grain Prices, And Feed Prices?
Nearly all farmers jumped on the ethanol bandwagon when it took off over 25 years ago. They saw its potential to create a new demand alternative for corn that would raise the price. Now that grain producers have been getting a suntan from the ethanol star and livestock producers have been getting a sunburn, it is not hard to see that ethanol has been driving corn prices and its co-product distillers’ dried grains (DDGS) has been driving the feed market.
Government subsidies and mandates, high crude oil prices, and the need to replace MTBE created the perfect scenario to thrust ethanol onto the stage with a fanfare of rising grain prices. Kansas State University economists Kevin C. Dhuyvetter, Terry L. Kastens, and Ted C. Schroeder analyzed the impact ethanol has had on the Cornbelt economy. They note that corn-based ethanol production has expanded six-fold in the past 10 years, but grew more than 33% just between 2006 and 2007, which they say will impact acreage, grain prices, and DDGS supplies.
As a point of reference, one bushel of corn provides 2.8 gallons of ethanol and 17-18 pounds of DDGS. As of December, 135 ethanol plants were operating with a capacity of 7.42 billion gallons per year. Another 74 were poised to begin operations, adding another 6.06 billion gallons of capacity per year. The economists say, “The key points are that the current economic conditions in the ethanol industry are such that rapid expansion going forward is unlikely. Furthermore, current media reports suggest that planned expansion has dampened the last few months.” Parallel to that, Congress has mandated the production and use of 15 billion gallons per year by 2015, but the economists doubt that goal will be much of a challenge to reach.
To have enough corn to reach the goal will be a point of concern. The economists predict total corn use exceeding 14 billion bushels by 2015 and a need for over 13 billion bushels every year from 2011 forward. That size of crop will depend on acreage and yield, and with yields increasing, they say, “The U.S. does not need to plant as many acres in the next several years as were planted in 2007. However, it does need to plant considerably more acres than the 80 million acres or so that has been planted in the past.” But they also acknowledge that a short crop at anytime will result in a significant bidding war for limited bushels.
Addressing the analysts who say we are in the middle of a price run up and it will fall back, the Kansas State economists say the current high prices are on the heals of some of the largest corn crops in history and they are the result of demand, not a supply shock. They predict, “We will continue to have a strong demand and the market will need to “buy corn acres” by offering higher prices than long-term averages.” And they remind us that ethanol impacts all crops, including hay, and that prices are above their long term averages for as far out as are being traded, with the expectation they are here to stay.
The DDGS co-product is offsetting 18 pounds of corn, but not all animals can consume large quantities of DDGS as they can corn. Another economic study at Kansas State calculated that based on the maximum daily consumption of different type of animals, the average livestock inventory could consume 52 million tons of DDGS per year. With the upward rate of ethanol production (and DDGS production) the 50 million ton mark would be reached in 2016. But not every animal will be forced to eat its share of DDGS, so some would be available for export, and prices would likely fall for DDGS supplies to be cleared out before spoilage occurred. DDGS prices rise, to some extent, along with corn prices, however based on prices of DDGS at a variety of US locations, the $40 variation suggests the basis between corn and DDGS is high.
Summary:
A 13-15 billion gallon ethanol production level will be reached in the next 5-7 years, and 86-90 million acres of corn need to be planted annually, even with the growing trend yield. They predict that crop prices will remain higher than long term historical averages, but there will also be increased variability. Prices of DDGS can be correlated with corn prices, so livestock producers will need to be concerned about feed costs.
Posted by Stu Ellis at 12:47 AM | Comments (0) | Permalink
February 12, 2008
Crop Disaster Assistance Plan: Is It A Plan Or A Disaster?
Congress is moving quite slowly on reconciling the differences between the House and Senate versions of the Farm Bill. Regardless of the reason, one of the differences is the Senate’s inclusion of a permanent disaster assistance program, which does not exist in the House version. The Crop Disaster Assistance program is a new controversial element usually reserved for ad hoc consideration, and not a permanent fixture of a Farm Bill.
The 2005 drought hurt many Cornbelt farmers, and although there were efforts to pass an assistance program, opponents said production risk should be covered by crop insurance and not an ad hoc financial support program. The same occurred in 2006, and when the Farm Bill debate began in the Senate in 2007, a proposal arose for a permanent program. But Ohio State economist Carl Zulauf and Mississippi State economist Keith Coble have suggested an airing of the issues in the countryside would be an important aspect to the future of the plan. Their analysis does not take any sides in the debate, but asks questions that would help Congress and agriculture come to a conclusion.
The Crop Disaster Assistance (CDA) program provides a payment to farmers if their county or an adjacent county is declared an agricultural disaster area with weather-related production losses exceeding 50% of normal yields. So states with traditionally low yields would be frequent candidates for the payment.
CDA payments would only be made to farmers who carried crop insurance and paid the fee for the non-insured crops. The payment would coincide with the crop insurance deductible. Zulauf and Coble suggest that the CDA payment is a subsidy to purchase crop insurance, as well as to purchase higher levels of crop insurance coverage. Farmers eligible for the CDA payment would not have any fees to pay, other than the fee for CAT insurance, so the only cost is a co-payment for insurance that covers intermediate losses.
The economists also suggest that CDA will most benefit farms that produce only a single crop, since revenue risk declines as the crop diversification increases. So the more crops produced, the less the risk, and the less likely a CDA payment would be received. The economists also suggest that the formula for a CDA payment creates the opportunity for cheating, since the CDA yield guarantee is the largest of three possible scenarios:
1) The farm’s actual production history yield.
2) 85% of the 5-year moving Olympic average yield
3) The farm’s counter-cyclical payment yield.
Zulauf and Coble say it is possible for a farmer to claim a low yield, triggering a CDA payment but suffer no or little reduction in future CDA payments due to the existence of the two alternative yield options.
The accounting rules for filing a claim are written in such a manner as to cause one to wonder why a farm only has to report 20% of direct payments as income, and why marketing loan, counter-cyclical payments, and Average Crop Revenue payments not have to be reported as income. Zulauf and Coble also say Congressional policy writers need to address the use of GRP and GRIP insurance by farmers applying for CDA payments, whether land owners with crop share leases are indemnified also, and what happens to farmers who operate in multiple counties, but only one might be included in the disaster declaration.
Summary:
The Senate’s plan for a disaster payment package in the Farm Bill is a new element in the realm of permanent policy but attempts to encourage farmers to buy crop insurance, knowing that if there is a disaster declaration their insurance deductible would be reimbursed by the disaster payment. However, the various elements to the program that are designed to make it flexible and attractive may also create a moral hazard.
Posted by Stu Ellis at 12:42 AM | Comments (0) | Permalink
February 11, 2008
Did You Hear The Latest Numbers?
The February Supply and Demand report issued by USDA is usually guaranteed to draw more yawns than to raise eyebrows. But last Friday’s World Agricultural Supply and Demand Estimates (WASDE) report was one for the history books. In the volatile market atmosphere of limit moves on the commodity exchanges, USDA’s tweaking of numbers and insights on market fundamentals provides a healthy ration of blog fodder.
The February 2008 WASDE Report caused major swings in market prices, with partial help from the wheat futures market.
Wheat
USDA reduced wheat ending stocks to the lowest level in 60 years, and calculated the stocks-to-use ratio as the least in 61 years. The export market for US wheat continues to be strong, a function of the 30 year low in global ending stocks for wheat. World wheat producers are only adding 0.6 million tons, indicating continued tightness for months to come. Major wheat consuming countries are getting anxious about the supply and while world wheat trade is already at high levels, it was raised again by USDA. The global demand has pushed US wheat prices higher, with season average prices $6.45 to $6.85 per bushel, about $2 higher than the previous record high 12 years ago.
Current production estimates remained at 2.067 bil. on 60.4 mil acres. Food use will be 945 mil., feed and residual will be 110 mil. bu., and exports will be 1.200 bil., with total use at 2.341 bil. bu. and carryout at 272 mil.
Corn
While the market was expecting a slight drop in the corn carryout, USDA stayed with its January estimate of just under 1.5 bil. bu. and kept most of the numbers for feed grains unchanged. The season average corn price was a bit more defined by USDA, which tightened it 5¢ to a range of $3.75 to $4.25. That is a record high, and USDA’s estimates for price for sorghum, barley, and oats are also record highs. Globally, lower corn production was offset with higher production of other feed grains, but Argentine corn production was cut 1 mil. tons from drought. There is also less corn in Mexico from less acreage, but South African production was raised 1 mil. tons from good weather. World trade in feed grains was left unchanged, and ending stocks were raised 400,000 tons.
USDA’s unchanged corn balance sheet has production at 13.074 bil. bu., feed use at 5.950 bil. bu., ethanol use at 3.2 bil. bu., exports at 2.45 bil. bu., and ending stocks at 1.438 bil.
Soybeans
US ending stocks were already low at 175 mil. bu. but USDA further reduced them to a 160 mil. bu. 19 day supply. Part of the reduction resulted from higher export estimates, raising that figure to just over 1 bil. bu. and also raising the crush estimate because of good crush margins and continued demand for meal. Soybean oil stocks were raised from the higher crush and from a higher oil yield than last projected. But soy oil use was dropped from lower estimates of bio-diesel production due to high prices for oil. USDA narrowed the price range for soybeans to $10 to $10.80. Meal prices are expected to range from $305 to $335, and soy oil prices are projected in a range of 47.5¢ to 51.5¢. Globally, lower soybean production will be countered with higher production of other oilseeds.
The soybean balance sheet has 2.585 bil. bu. for production, 1.835 bil. bu., for the crush, 1.005 bil. bu. for exports, and carryout at 160 mil.
Summary:
The global grain trade is on fire with short supplies and high demand for wheat, feed grains, and oilseeds; and the result is higher prices. A 30 year low in global wheat stocks will not be changed much from Southern Hemisphere crops, and that is combined with a 60 year low in US wheat carryout. While US corn supplies are adequate, world feed grain trade is high because of less feed wheat being available and Southern Hemisphere corn producers not increasing mid-year production. US soybean stocks are quite low from meal and oil demand, but bio-diesel production is beginning to fade from high oil prices.
Posted by Stu Ellis at 12:30 AM | Comments (0) | Permalink
February 8, 2008
Extension Update
Extension Update is a weekly summary of news from Extension, government, and other attributable sources, focused on marketing, farm management, and other issues that are of interest to Midwestern farm owners and operators.
USDA Supply/Demand numbers Friday will revise the grain ending stocks estimates. The market expects the Jan. corn carryout of 1.438 bil. bu. to drop to 1.412 bil. and the Jan. soybean carryout of 175 mil. bu. to be lowered to 166 mil. Additionally, the market expects the wheat carryout of 292 mil. bu. from the Jan. report to drop to 273 mil. bu.
15% more for corn and 10% more for beans are the estimated increases in production costs for 2008 crops, compared to last year say IL Extension economists Gary Schnitkey and Dale Lattz. Those operational costs would be $370 for corn and $220 for beans per acre, and those do not include land costs, such as cash rents or mortgage payments.
The additional costs result from anhydrous ammonia prices climbing to $700 per ton and total fertilizer costs estimated at $30 more per acre for corn and $10 for beans. They add land costs and corn production rises to $550 per acre and beans to $400 per acre. That means breakeven prices are $3.06 on 180 bu. corn and $7.41 for 54 bu. soybeans.
If you are still working on crop budgets, and want to calculate the optimum economic rate of nitrogen application, the price of corn and the cost of anhydrous ammonia are moving targets. Purdue economists say the optimum agronomic rate may be 173 lbs of N on a given field, but the optimum economic rate on the same field was 149 lbs of N. Get current rates.
Calf prices were at record levels in 2005, but they have declined 16¢ per pound from higher feed costs. Purdue livestock economist Chris Hurt says that cuts the value of a 500 lb. calf about $80 per head. Across the livestock industry, that is a nearly $3 billion annual loss. Read more.
Land for pasture grazing has become more scarce and expensive as ground is turned to crop production, says Iowa State livestock economist Shane Ellis. He adds, “If crop prices remain at their current levels it will become increasing difficult for cattle producers to compete without a dramatic increase in beef prices. This is especially true in Iowa where we have seen some of the most dramatic declines in cow numbers.” Read more.
With the red ink in the pork market comes a welcome report that consumer demand was up 2.6% in 2007, and total demand up 3.6% with the help of exports and population growth. MO livestock economist Glenn Grimes all meats recorded demand growth last year, but exports and population have pushed pork demand up 26% over 22 years ago. Read his latest hog outlook.
If glyphosate won’t kill your waterhemp, what do you do, in case it is also immune to ALS, PPO, and triazine herbicides? IL Extension weed specialist Aaron Hager has a series of integrated approaches to stave off some potential new challenges:
1) Use a full-labeled rate of a soil-applied herbicide 7 days before to 3 days after planting
2) Apply 1.0 lb a.e. of glyphosate alone per acre when waterhemp is 3-5 inches tall.
3) Scout fields 7 days after initial glyphosate application to determine effectiveness
4) If treatment fails, apply a PPO-inhibiting herbicide at full labeled rate ASAP.
5) Re-scout in 10-14 days and if treatment failed, rogue survivors before they reproduce.
Recent devastating weather does not indicate bad weather for the rest of the year says MO climatologist Pat Guinan. He says the typical winter jet stream over the southern US creates increased instability between cold fronts and warm moist air. Guinan says since tornadoes can occur in any month, winter tornadoes are not a bellwether for the year.
If you are concerned about nitrogen loss from heavy rains, Purdue agronomists say fall applied nitrogen will still be in place. They report most of the losses are in the spring when the temperature warms up. They say before ammonium applied as anhydrous ammonia can be lost, it has to be converted to nitrate, and that has not yet happened. Read more.
It may be tempting to feed your wheat an early helping of nitrogen, but OH agronomist Edwin Lentz says most of the N will be lost if applied to frozen ground and he says wait until spring green-up. He says the benefit of frozen ground application is not a trade off considering the average yield loss is 19% from the loss of the nitrogen fertilizer. He says if you can’t wait, ammonium sulfate would have the least loss. Read more.
Dairy operators are seeing lower prices, following 2007, when international demand and the weak dollar brought Europeans to the US dairycase. MO dairy economist Scott Brown says feed and other production costs will rise, while dairy prices will fade in 2008. Compared to the nearly $22 per cwt market highs, he predicted a 2008 average of $16.90.
Dairymen will be challenged in 2008 with supply control, since more cows are entering herds along with higher production per cow. Brown says increased feed costs will slow down some production, but there will be a problem finding markets for more milk.
Vehicle tax deductions can either be based on $.485 per mile in 2007 or actual expenses, and OH farm management specialist Donald Breece says that rate rises to $.505 in 2008. He says a farm business can claim up to 75% of the use of a car or truck as business use without any travel records if it is used most of the day on the farm. Depreciation and cost information.
Posted by Stu Ellis at 12:36 AM | Comments (0) | Permalink
February 7, 2008
Think About This: Is Production Agriculture Really Benefiting From The Bio-diesel Demand?
Bio-diesel. The exciting new bio-fuel which has pushed the price of beans into the teens. Bio-diesel, a new use for the nation’s surplus stockpile of soybean oil. If we can’t eat it, we can burn it. And soybean organizations nationwide have climbed on the bio-diesel bandwagon to promote the product as an alternative to imported petroleum-based diesel. But who is benefiting from this effort? You may be surprised.
With the help of the new federal energy policy, bio-diesel use is supposed to grow from 500 million gallons next year to one billion gallons in 2012. But the mandated use comes at a time when high prices of soybeans and subsequent high prices of soybean oil are nearly eliminating the margins of the companies which make bio-diesel from soybean oil. Iowa State University economists Miguel Carriquiry and Bruce Babcock write in the winter issue of the Iowa Ag Review that the increased demand will push soybean oil prices higher and further increase the cost of making bio-diesel. That means the cost of the product may be higher than consumers are willing to pay and theoretically, sales and production would be curtailed, as a result of the federal mandate.
But will the industry grind to a halt? The Iowa State economists say investors cannot be expected to finance an industry that makes no profit, and while the 500 million gallon target is supposed to be reached next year, the US actually has the capacity to make 1.85 billion gallons. They say biodiesel was priced at $4.20 per gallon in Iowa in early January, and based on soybean oil consumption, that would be the breakeven price if soybean oil were no more than 48¢ per pound. But it was a half cent higher at the time, and a negative profit margin would cause most plants to stop.
The industry did not stop, because if the demand falls and the price drops below the breakeven point, then plants will resume production since profits would return. So the unused production capacity and another 1.4 billion gallon capacity being built will ensure that soybean oil prices do not fall below the breakeven price. Despite the mandated production, the bio-diesel industry will only benefit if the price of soybean oil is below breakeven levels.
But Carriquiry and Babcock say with soybean oil futures above 50¢ per pound, wholesale soy diesel has to be priced at $4.50 per gallon, which would be a function of crude oil priced at $155 per barrel. An alternative for such a high bio-diesel selling price would be the value that it provides as an oxygenated fuel. Early in January, the spot price of bio-diesel was $4.15 per gallon, and with the $1 per gallon tax credit provided to blenders, the effective price was $3.15. At the time, users compared it equally to petroleum diesel at $2.80 per gallon, negating the 35¢ difference. The economists also say the blender purchase of bio-diesel could be subsidized or the price of bio-diesel could be set by the government at a level allowing the producers to stay in business, and the consumer would have to pay the premium charge.
The interesting aspect of the federal energy requirement is the fact bio-diesel prices cannot fall below the break-even point, but cannot rise too much above it. If that is the case, who benefits? Carriquiry and Babcock say the ultimate beneficiary of the federal bio-diesel mandate is really the farm operator and farm owner who are receiving high prices for soybeans as a result of the high price of soybean oil.
Summary:
The federal energy bill mandated increased production and use of bio-diesel, which not only creates more demand for soybeans and soy oil, but also creates a catch-22 for the biodiesel production industry. The industry has a breakeven point for soybean oil that determines profitability, but prices above or below that point cannot be sustained for any length of time. The breakeven point supports a high price for soybean oil, and production agriculture receives the benefit from high prices for soybeans.
Posted by Stu Ellis at 12:57 AM | Comments (0) | Permalink
February 6, 2008
What Is The Potential For Two Checks In The Mailbox?
“Double-dipping” is a term usually reserved for politicians, whom might serve as a full time alderman paid by a big city, then go to the state capital and draw a second salary as a state senator or representative. But the way certain farm programs are written can create similar scenarios for farmers to receive a double payment on the same crop, such as crop insurance and a disaster payment, or a price support payment plus a crop insurance indemnity. When that hits big newspapers or TV network investigators come calling, it is time for crisis management in agricultural public relations.
It is hard to tell just when agriculture will have a new policy, since the Farm Bill is unfinished and there is little movement being reported on reconciling the differences between the House and Senate proposals. But when new policy is created, as is the case with the Senate’s Average Crop Revenue and the House’s Revenue Counter Cyclical Program, there is always the potential for unintended consequences says Ohio State economist Carl Zulauf. He believes that the way those programs are written, there is a chance for a price support payment to be made while farmers are also financially benefiting from a crop insurance indemnity check or even a disaster assistance payment.
Zulauf’s analysis about the double payments indicates the potential for public criticism of farm programs as well as keeping funds from farmers who may need them. There is perennial debate about the potential for doubling up on crop insurance and disaster payments, but Zulauf says his concern is the basic price support programs could also pay off the way they are currently written.
Last summer’s federal disaster aid program that covered agricultural losses since 2005, contained limits on how much aid could be collected by a farmer, and capped it at 95% of normal crop value. It allowed disaster aid to be collected, but only to the extent that it covered crop insurance deductibles and nothing more. Essentially it prevented double payments.
The new price support programs proposed by the House and Senate are different, but are revenue-based, instead of yield or price based. Thus revenue could decline with a large decline in price, which could trigger marketing loan benefits or counter cyclical payments. A double payment would be precluded by the program, but Zulauf says double payments would not be precluded if both the price support program pays off as well as crop revenue insurance or disaster aid payments. Market conditions would determine the extent of the payments.
So what should happen? Zulauf suggests several options, including:
1) Subtract the one of the payments from another to eliminate the double payment.
2) Establish program parameters that preclude double payments, such as in the case of last year’s disaster assistance legislation.
3) Limit total payments to a percent of a farmer’s typical crop income.
Is the double payment potential a concern to you, and if so, what would you suggest?
Summary:
Congress placed limits on the 2007 disaster aid program to prevent a farmer from collecting both from crop insurance and from disaster assistance. However, those payments would still be made, even if one of the new Congressional proposals for a farm safety net also pays off. The Congressional alternatives provide either average crop revenue or a counter cyclical revenue payment, and depending on market conditions, a payment could be triggered from one of those, in addition to the crop loss assistance.
Posted by Stu Ellis at 2:34 AM | Comments (0) | Permalink
February 5, 2008
My! This 10-Year Cattle Cycle Went By In A Hurry!
Cowboys may see the end of a long hard trail off in the distance, but some economic storm clouds may hit before they get home. That seems to be the consensus of livestock economists who have analyzed USDA’s Cattle Inventory report released last Friday. Cattle numbers are changing, the cattle cycle has been impacted, but market volatility can be expected for both cattle prices and feed costs. If you are raising cattle, how will you be affected?
Four years ago the latest expansion cycle began in the cattle industry, but instead of the average ten year swing, it may be diminishing already. Nebraska livestock economist Darrell Mark calls that “pre-mature.” The inventory on January 1 was 96.67 million head, with a 338,000 liquidation of cows last year causing the turn-around. Purdue livestock economist Chris Hurt attributes that to the drought in the Southeastern US last year that destroyed pasture and forage for many livestock producers.
Beef cows numbered only 32.6 million head at the first of the year, the least amount since 1991. The beef cow herd had been expanding the past three years, but that has come to an end. Hurt’s analysis of the USDA inventory indicates the number of replacement heifers will also decline by 4%, meaning 2008 will still bring fewer cows.
While not technically in the beef category, Darrell Mark notes that the USDA’s numbers do include dairy cows, “While beef cow herd and beef replacement heifers inventories were lower than year-ago levels, the number of milk cows and dairy replacement heifers posted increases of 1.0% and 3.4%, respectively.” Hurt says the demand for dairy products will continue to push that industry to increase in size, “Strong export and domestic demand enabled milk prices to rise more rapidly than feed costs in 2007.”
But back to the beef industry, there are several other dynamics going on there. The western Cornbelt is recording a decline in cattle. After becoming a feed trough full of distillers’ dried grains, the western Cornbelt is looking at pasture as potential cornfields in the wake of $5 corn. Chris Hurt says Iowa cow numbers dropped 5% and Missouri cow numbers by 3%. Indiana and Illinois cow herds remained stable.
Another dynamic is the high price of wheat, which has caused producers to avoid gra